HONG KONG (Reuters) - When Zhang Xixi, a 25-year-old staffer at an online financial company in China’s southern province of Guangdong, decided last year to buy personal insurance for the first time, he was swamped with options.

FILE PHOTO: A bird flies over AIA Tower, named after American International Assurance Co (AIA), in Hong Kong February 27, 2009. REUTERS/Bobby Yip/File Photo

Local insurers rushed to offer him products with attractive financial returns. In the end, he decided on a simpler, “more reliable” product sold by the unit of a U.S. life insurer.

Customers like Zhang are helping foreign insurers quickly gain market share in China, aided by a regulatory crackdown on short-term investments packaged as insurance that has hurt many of their local rivals.

The growth of China’s middle class and their rising wages have meant more people are looking for insurance, said Asia-focused AIA’s regional chief executive, John Cai, who leads the company in China and some Southeast Asian markets.

“We have the differentiated strategy by focussing on selling protection products ... and we reaped the benefit of that,” he said, referring to a 60 percent jump last year in the Hong Kong-based company’s value of new business in China, up from a growth rate of 54 percent in 2016.

Foreign insurers, including AIA Group, Aviva and Prudential have been in China for decades, but their collective market share is still below 10 percent as a result of regulatory restrictions and limited awareness about insurance as coverage rather than an investment.

Current rules limit foreign holdings in Chinese insurance joint ventures to 50 percent. AIA is the only wholly owned foreign insurance firm in China as its operations were set up before the restrictions were introduced.

Beijing said last year it planned to lift the ownership cap to 51 percent for foreign insurance joint ventures in 2020 and remove the limit completely two years later, which would allow for further expansion.

Both Prudential and Aviva saw new business profit in China, a key measure of long-term profitability, more than double last year on the back of higher demand for traditional protection products.

Many foreign insurance companies are strengthening their presence in smaller cities, where insurance penetration - measured in terms of the value of premiums underwritten as a percentage of gross domestic product - is lower than the 3 percent of GDP figure for the country as a whole.

Insurance ownership in the United States runs at 7 percent of GDP and is at 10 percent in Britain and Japan. China’s relatively low rate and strong economic outlook is the biggest draw for foreign insurers.

That has led to a hiring binge: leading foreign insurers are looking to bring on up to 40 percent more front-line sales agents in China this year - twice the rate of recent years, executives and consultants said.

AIA, for example, had close to 35,000 agents at the end of last year compared with 15,000 in 2014, and Cai expects a similar hiring growth rate as the company expands into second- and third-tier cities.

The sector regulator in China is also likely to make it easier for foreign insurers to expand into new provinces, said a Beijing-based lawyer who works with the China Insurance Regulatory Commission.

LOCAL COMPETITION

Top Chinese firms such as China Life Insurance and Ping An Insurance Group remain dominant players on their home turf, collectively holding about 90 percent of the life insurance market.

But their industry is in the midst of a massive regulator-driven clean-up of the life insurance sector, the world’s No. 3 market, to limit risk to the financial system.

Last month, Beijing took control of Anbang after keeping it under the microscope over the past year or so for risky behaviour.

As a result of those measures, Chinese insurance firms saw their net operating cash flow slump 65 percent in 2017, Reuters reported in January, citing data in a government memo. Assets held in universal life insurance funds dropped 50 percent.

Rating agency Fitch expects premium growth to remain low in 2018 as Chinese life insurers shift from short-term investment products to more complicated products with protection features favoured by the regulator.

“We have traditionally focused on that business, certainly in the last three or four years, on health and protection products versus competing for savings or bank-type products,” said Prudential Group’s chief executive Mike Wells.

Enthused by a surge in demand, growing awareness and rising wealth in smaller Chinese cities such as Foshan, Taizhou and Xuzhou, insurers such as AIA and Prudential are stepping up their presence in those markets, executives said.

“From the growth rate you can tell the opportunity is there, the market is even less penetrated. However, the wealth effect and the average income is rising,” AIA’s Cai said, referring to the smaller Chinese cities. “So we do see similar success will be coming there.”